Companies seek unbiased investment advice for employees

A new federal rule that takes effect later this month is intended to help employees make better choices about how to invest in their 401(k) or similar retirement plans.

The intended result is ensure the financial advisers that employers bring into the workplace to explain the options are not also receiving payment from the companies administering those plans.

In other words, the goal is impartial information presented by an unbiased source.

The existing regulation from the U.S. Department of Labor's Employee Benefits Security Administration already requires employers to provide workers with general information about the retirement plan and their investment options.

The new rule, which takes effect Dec. 27, is an outgrowth of concerns on the part of the U.S. Government Accountability Office about the impartiality of that advice provided to employees. The GAO said sponsors of 401(k) and similar “participant-directed” retirement plans face conflicts of interest from service providers assisting in the selection of investment options due to third-party payments.

Providers who help companies establish and maintain their retirement plans may get payments from investment fund companies for recommending their products. The payments, known as revenue sharing, create a conflict of interest because the provider may receive greater compensation from certain funds.

The GAO said the conflicts also could lead to higher costs for the retirement plan, which typically would be borne by the participants.

The GAO estimates that increased use of sound, unbiased advice could reduce investment mistakes by between $7 billion and $18 billion annually.

Rita Jelinek, vice president and co-owner of Midwest Metal Products in Cedar Rapids, uses a financial adviser located in Des Moines. 401k Advisors, part of the Viejo, Calif., group, provides an annual plan overview and also meets one-on-one with employees to discuss specific investment decisions, she said.

Midwest Metal Products had been using the services of a large financial services company, she added, but it wanted an independent source providing investment education for its employees.

“I feel 401k Advisors does a great job of assessing what is out on the market and looking at managers and how funds are functioning, “ Jelinek said.

In the past, financial service providers have been able to provide investment education consisting of generic asset allocation models that are not tailored to a specific individual. Employers also have been able to make arrangements for their workers to receive investment advice, as long as it comes from an independent third party.

The new rule allows workers to obtain specific advice from the company running their 401(k) or similar plan - as long as the advice is based on a computer model that is certified as unbiased and employs generally accepted investment theories.

The adviser also has to be paid on a “level fee” basis, meaning the fee does not vary depending on the investment selected by an employee.

Companies running 401(k) or similar plans must disclose the fees paid to advisers and provide an annual audit of the transactions.

“The Department of Labor has provided a model comparative chart listing investment disclosures that must be provided to plan participants,” said John Stiglich, vice president of employee benefit services at Clifton Gunderson Wealth Management.

“While the Department of Labor does not require plan sponsors to use this exact format, all the information required by the regulations is contained in the sample chart.”

“We've worked with Steele Capital Management (of Dubuque) for many years,” said Barb Hagen, executive vice president of operations at Benefit Solutions. “Their contact people come in and talk with our employees if they want assistance in deciding their investments.

“They ask our folks to fill out a questionnaire that looks at their risk tolerance. They go through how many years an employee has until retirement and what their comfort level is with losing money.”

After determining an employee's risk tolerance and the number of years they have to build their retirement income, The Dubuque company's representative recommends a portfolio that looks at the type of funds needed to achieve that goal. The company does not recommend specific products, Hagen said.

“If you are conservative in your tolerance of risk, your portfolio is going to look a lot different than the portfolio of someone whose approach is aggressive,” Hagen said.

While the GAO was concerned about unscrupulous advisers steering employees into costly and inappropriate investments, the Labor Department wants to reduce the number of investing errors that can significantly affect an employee's retirement nest egg.